Client Alert

Car Report

9/12/2005

Car Buyer’s Bill of Rights

In July, California’s Governor Schwarzenegger signed into law the nation’s first "Car Buyer’s Bill or Rights."  The bill is a compromise. Consumers who buy a vehicle valued under $40,000 will have a two-day right to rescind and get a full refund, but it allows car dealers to charge $250 for this service. AB 68 also governs what a "certified" used car means, and requires dealers to disclose consumers’ credit ratings as well as the vehicle’s base price (exclusive of add-ons). The bill also limits the "dealer spread" to 21⁄2% for 60-month finance contracts and 2% for contracts longer than 60 months. The law becomes effective July 1, 2006.

Practice Tip:  Aside from the cap on the dealer spread, AB 68 will have little effect on vehicle financers. For consumers who elect this service, creditors will want to make sure they delay funding until the rescission period has run.

For more information, contact Jay Thomson (jthomson@mofo.com).

Negative Equity—The Next Wave?

Knowing your dealer is good advice, as any addict will tell you. It’s also true of financers of consumer automobile contracts. Failure to heed this maxim could result in an overdose of legal problems.

"Negative equity" happens when a consumer owes more on a trade-in than the car is worth. It is estimated that 40% of new car buyers are "upside down" on their trade-ins, spurred by big discounts on new cars (which depresses the value of used cars) and the proliferation of six- and even seven-year sales finance contracts. The "upside downers" will want to add the amount they owe on their trade-in to what they owe on the new car. If the dealer documents things correctly, there is no problem. If not, there could be trouble.

Dealers wants to sell cars. But negative equity can be a barrier to getting financing. So, some dealers get around the problem by increasing the stated cash value of the new car, which makes it look as if the customer paid hard cash. That’s what happened in Thompsonv.10,000 RV Sales, Inc., 130 Cal.App.4th 950 (2005), a case decided in June. There, the California appellate court held that this "common practice" violates the federal Truth in Lending Act as well as California’s auto sales finance law and California’s unfair competition law, Section 17200.

Practice Tip:  Thompson should not cause any creditors heartburn. As the appellate court recognized, the lender is just as much the victim as the consumer and "cannot determine fraud from the face of a contract when the numbers have been manipulated."  Still, stranger claims have been filed against creditors, and already a number of "negative equity" cases have been brought. Class actions can’t be far behind.

For more information, contact Jay Thomson (jthomson@mofo.com).

Auto Leasing—Consumer Victory

Consumers take a back seat when auto leasing companies stop writing leases. That’s what happened in New York in 2003. Lessors abandoned the state because of New York laws that hold auto lessors vicariously liable for personal injury and property damages caused by their lessees. The recent federal highway bill ends that.

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